Securities class actions and conditional conservatism: Evidence from two legal events

We use two US court rulings as exogenous shocks to firms' litigation environment and examine the changes in conservative financial reporting following these decisions. The Silicon Graphics ruling 1999 imposed a heightened pleading standard discouraged filing of shareholder lawsuits against firms with headquarters Ninth Circuit. Tellabs 2007, however, effectively reversed made it easier file securities Circuit firms. predict find that reduced risk discourages for By contrast, elevated threat encourages relative non-Ninth disciplining effect on conservatism is stronger facing higher ex ante risk. litigation-risk-induced increase (decrease) leads (lower) firm valuations.